Business Statistics

476 Business Statistics

14.8.2 Constant Error Variance (Homoscedasticity)

The assumption of homoscedasticity is also referred to as constant error variance. As the name sug-

gests, the assumption of homoscedasticity or constant error variance requires that the variance around

the line of regression should be constant for all the values of x

i

. This means that the error variance

should be constant for low values of x as well as for high values of x. As shown in Figure 14.32, the

assumption of homoscedasticity can be judged from a plot of residuals and values of x

i

. Figure 14.32

exhibits the violation of the homoscedasticity assumption of regression. ...